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CONTENTS page Management Body 4 Corporate Governance 5 Statement of the Management Board 6 Report of the Auditors 10 Financial Statements as of 31 December 2004 in compliance with IFRS 11 List of West-East Bank AD Correspondent Banks 32 3 Contact List 33
Boris Pesjak President of Supervisory Board Dusan Valencic President of Management Board and Executive Director Safi Harb Ph.D. Procurator 4 Nabil K. Issa Member of Management Board and Executive Director Georgy Petrov Member of Management Board and Executive Director
WEST-EAST BANK AD CORPORATE GOVERNАNCE Shareholders Structure Aktiva Holdings BV, Holland - 72.51% LB Maxima Ltd, Slovenia - 24.50% Factor Banka DD, Slovenia - 2.99% Supervisory Board Boris Pesjak - President of Supervisory Board Darko Horvat - Deputy President of Supervisory Board Janez Sencar - Member of Supervisory Board Matthias Eckert - Member of Supervisory Board Andrej Hazabent - Member of Supervisory Board Management Board and Procurator Dusan Valencic - President of Management Board and Executive Director Nabil K. Issa - Member of Management Board and Executive Director Georgy Petrov - Member of Management Board and Executive Director Safi Harb Ph.D. - Procurator 5
STATEMENT OF THE MANAGEMENT BOARD OF WEST-EAST BANK AD Dear all, The year 2004 was the first fully operational year of West-East Bank AD, Sofia. The main characteristics and conclusions are as follows: Targets vs. actual results: For the first year of operations the Supervisory Board of the bank set three main targets: - To make the bank fully operational from the point of view of establishing client s base and giving it high level service, setting-up effective internal organization and risk management; - Balance Sheet size to be EUR 30 million; - Cumulative operating profit at the end of the year to be positive. We, as a Management of the bank, can conclude that these goals have been fulfilled. The bank is fully capable to perform most of the banking operations needed from its corporate client s base while the retail banking is not our strategic orientation. The main indicator about client s base established is 402 clients, out of them 241 corporate and 161 individual. By implementing modern state of the art electronic banking system, our clients channelled through our bank a turnover of BGN 88.9 million /domestic payments/ and EUR 34.8 million /international payments/. The complete inspection of the Central Bank Supervision in January 2005 confirms the satisfactory level of our internal operating systems and risk management procedures. Some of their additional recommendations will be fully incorporated in the first half of the year 2005. As per 31.12.2004, the balance sheet size has reached BGN 70,4 million (EUR 36 million) while operating profit for the entire year was BGN 1,23 million (EUR 0,63 million). According to the way how operating profit is calculated (daily amortization of revenues and expenses over their life time) the operational profit should remain stable since we reached break-even point in May 2004. Graph 1 shows the growth of the Assets during the year 2004. 6
Other indicators of the bank s performance The total net profit of the bank for year 2004 is BGN 135,7 thousands (EUR 69,4 thousands) /graph 2/. This level of profit corresponds to the strategic guidelines of our supervisory board that the bank has to establish a satisfactory level of the loan s provisions and to meet legal requirement to have reserve fund that corresponds to 1,25% of the total assets plus off-balance sheet commitments. After the first year of the operations we allocated specific provisions in the proportion of 1,35% of the total loan portfolio and legally required 20% of the net profit to reserve fund. Our target is that within a period of three years we will establish 5% level of specific provisions as well as to be able to fully reach the level of 1,25% of legal reserves. The General Shareholders Meeting decided that the remaining profit of BGN 108,5 thousand (EUR 55,5 thousand) will be used for partially cover the loss from the year 2003 (pre-operating costs of establishing the bank). 7 The amount of the capital paid-in upon establishing the bank in 2003 was BGN 13,7 million (EUR 7,0 million). In April 2004 the capital increase in the amount of BGN 2,1 million (EUR 1,07 million) has been provided to off-set the effect of pre-operating cost that decreased the capital base of the bank. At the end of 2004 the capital base amounted to BGN 13,8 million (EUR 7,1 million) with capital adequacy ratio of 23,2%. The Management Board estimates that the quality of our assets is good. Similar conclusion was given by above mentioned Central Bank inspection. At the end of the year 2004 the level of performing loans was 100%. The concentration of the loan portfolio by economic sectors is illustrated in graph 3.
8 The Bank has also established stable funding potential that represents the combination of banking sources (46,2% of total liabilities) and non-banking sources (53,8% of total liabilities). We are pleased that within the first year of operations already 10 Bulgarian and 5 international banks have established non-covered commercial and money market limits in favour of our bank. Graph 4 and 5 provide summary of the structure of Assets and Liabilities of the Bank.
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REPORT OF THE AUDITORS TO THE SHAREHOLDERS OF WEST- EAST BANK AD We have audited the accompanying balance sheet of West-East Bank AD ( the Bank ) as at 31 December 2004 and the related statements of income, changes in shareholders equity and cash flows for the year then ended. These financial statements set out on pages 3 to 27 are the responsibility of the Bank s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements present fairly, in all material respects, the financial position of West East Bank AD as at 31 December 2004, the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards. 10 Stefan Nenov Snejanka Nikolova PricewaterhouseCoopers Audit OOD 31 March 2005 Sofia, Bulgaria
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Statement of changes in equity 13
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1 General information and accounting policies West-East Bank (the Bank ) was established on 11 November 2002 as a result of the foundation meeting held by the following shareholders: Activa Holding B.V., Factor Bank Pls and LBMaxima D.O.O. The Bank was registered as a Bulgarian joint stock company on 28 August 2003 with the Sofia Court after receiving a license from the Bulgarian National Bank on 13 August 2003. The Bank started its operations on 1 October 2003. The Bank is managed through a Supervisory Board consisting of 5 members and a Management Board consisting of 3 members elected for a period of 3 years. The Bank s principal business activity is lending to micro, small and medium-sized businesses within Bulgaria. The Bank s activities are conducted through its headquarters in Sofia. The principal accounting policies adopted in the preparation of these financial statements are set out below. a Basis of presentation The financial statements of the Bank are prepared in accordance with International Financial Reporting Standards ( IFRS ). The financial statements are presented in the national currency of Bulgaria, the Leva (BGN). They are prepared under the historical cost convention, as modified by the revaluation of avaiable-for-sale investment securities and financial assets held for trading. Due to the fact that the Bank commenced its operation on 1 October 2003, the comparative financial statements cover the three-month period from that date to 31 December 2003. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management s best knowledge of current events and actions, actual results ultimately may differ from those estimates. Where necessary corresponding figures have been adjusted to conform with changes in presentation of the current year. b Foreign currencies Foreign currency transactions are accounted for at the exchange rates prevailing at the date of the transactions: gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. At 31 December 2004, monetary assets and liabilities denominated in foreign currency are translated into Bulgarian Leva at the official Central Bank exchange rate - BGN 1.95583 for EURO 1 and BGN 1.43589 for USD 1 (31 December 2003: BGN 1.95583 for EURO 1 and BGN 1.54856 for USD 1). 15 c Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or realize the asset and to settle the liability simultaneously. d Income and expense recognition Interest income and expense are recognised in the income statement for all interest bearing instruments on an accrual basis using the effective yield method based on the actual purchase price. Interest income includes coupons earned on fixed income securities and accrued discount and premium on treasury bills and other discounted instruments.
d Income and expense recognition (continued) When loans become doubtful of collection, they are written down to their recoverable amounts and interest income is thereafter recognised based on the rate of interest that was used to discount the future cash flows for the purpose of measuring the recoverable amount. e Fees and commissions Fee and commission income consist mainly of fees for local and foreign currency money transfers, cash operations and are generally recognised on an accrual basis or at the date of transaction, as appropriate. Loan origination fees for loans are deferred and recognised as an adjustment to the effective yield on the loan. Fees and commission expense relates to fees incurred by the Bank in dealings with other banks, and are recognized at the date of the transaction. f Trading securities Trading securities are securities, which were either acquired for generating a profit from short-term fluctuations in price or dealer s margin, or are securities included in a portfolio in which a pattern of short-term profit taking exists. The Bank classifies securities into trading securities if it has an intention to sell them within one year after purchase. Trading securities are initially recognized at cost (which includes transaction costs) and subsequently re-measured at fair value based on bid prices quoted by Reuters. However, in a developing capital market, the prices with which transactions are realised can be different from quoted prices. While management has used available market information in estimating fair value, the market information may not be fully reflective of the value that could be realised in the current circumstances. All realised and unrealised gains and losses are included in gains less losses arising from trading securities in the income statement in the period in which the gains/losses occur. All purchases and sales of trading securities that require delivery within the time frame established by a regulation or market convention ( regular way purchases and sales) are recognised at settlement date. g Investment securities 16 Investment securities intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices are classified as available-for-sale. Management determines the appropriate classification of its investments at the time of the purchase. Investment securities are initially recognised at cost (which includes transaction costs). Available-for-sale securities are subsequently re-measured at fair value based on quoted bid prices or amounts derived from cash flow models. Unrealised gains and losses arising from changes in the fair value of securities classified as available-for-sale are recognised in the income statement. Held-to-maturity investments are carried at amortised cost using the effective yield method, less any provision for impairment. Interest earned whilst holding investment securities is reported as interest income. All regular way purchases and sales of investment securities are recognized at settlement date, which is the date the Bank actually trades the relevant assets.
h Originated loans and provisions for loan impairment Loans originated by the Bank by providing money directly to the borrower or to a sub-participation agent at draw down are categorised as loans originated by the Bank and are carried at amortised cost, which is defined as the fair value of cash consideration given to originate those loans as is determinable by reference to market prices at origination date. All loans and advances are recognised when cash is advanced to borrowers. A credit risk provision for loan impairment is established if there is objective evidence that the Bank will not be able to collect all amounts due. The amount of the provision is the difference between the carrying amount and the estimated recoverable amount, calculated as the present value of expected cash flows, including amounts recoverable from guarantees and collateral, discounted based on the interest rate at inception. The provision for loan impairment also covers losses where there is objective evidence that probable losses are present in components of the loan portfolio at the balance sheet date. These have been estimated based upon historical patterns of losses in each component, the credit ratings allocated to the borrowers and reflecting the current economic climate in which the borrowers operate. When a loan is uncollectable, it is written off against the related provision for loan impairment. Subsequent recoveries of amounts previously written off are treated as income. If the amount of the provision for loan impairment subsequently decreases due to an event occurring after the write-down, the release of the provision is credited to the provision for loan impairment line in the income statement. i Equipment and other fixed assets All equipment and other fixed assets are stated at historical cost less depreciation, and impaired where required. Depreciation is calculated on the straight-line method to write off the cost of each asset to its residual value over its estimated useful life. The following depreciation rates have been used: Computer hardware 25% Vehicles 20% Other fixed assets 15% Equipment and other fixed assets are periodically reviewed for impairment. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is written down immediately to its recoverable amount. 17 Gains and losses on disposal of property and equipment are determined by reference to their carrying amount and are taken into account in determining operating profit. Repairs and maintenance are charged to the income statement when the expenditure is incurred.
j Intangible fixed assets Intangible assets comprise mainly computer software and are stated at cost less accumulated amortisation and impairment. Amortisation is calculated on the straight-line method to write off the cost of each asset to their residual values over their estimated useful life of four years. k Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than 90 days maturity from the date of acquisition including: cash, balances with the Bulgarian National Bank (BNB) excluding the statutory minimum required reserve, and amounts due from other banks. l Provisions Provisions are recognized when the Bank has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Employee entitlements to annual leave are recognized when they accrue to employees. A provision is made for the estimated annual leave as a result of services rendered by employees up to balance sheet date. m Operating leases Payments made under operating leases are charged against income in equal installments over the period of the lease. n Income taxes Taxation has been provided for in the financial statements in accordance with Bulgarian legislation currently in force. Current tax is calculated on the basis of the taxable profit for the year, using the tax rates enacted at the balance sheet date. Taxes other than on income are recorded within operating expenses. Deferred income tax is provided using the balance sheet liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Currently enacted tax rates are used in the determination of deferred income tax. 18 Income tax payable on profits, based on the applicable tax law in each jurisdiction is recognised as an expense in the period in which profits arise. The tax effects of income tax losses available for carry forward are recognised as an asset when it is probable that future taxable profits will be available against which these losses can be utilised. 2 Financial risk management a Strategy in using financial instruments By its nature the Bank s activities are principally related to the use of financial instruments. The Bank accepts deposits from customers and seeks to earn above average interest margins by investing these funds in high quality assets. The Bank seeks to increase these margins by consolidating short-term funds and lending for longer periods at higher rates whilst maintaining sufficient liquidity to meet all claims that might fall due. The Bank also seeks to raise its interest margins by obtaining above average margins, net of provisions, through lending to commercial borrowers with a range of credit standing. Such exposures involve not just on-balance sheet loans and advances but the Bank also enters into guarantees and other commitments.
a Strategy in using financial instruments (continued) The Board places trading limits on the level of exposure that can be taken in relation to both overnight and intra-day market positions. b Credit risk The Bank takes on exposure to credit risk which is the risk that a counterparty will be unable to pay amounts in full when due. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and the geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. Limits on the level of credit risk by product and industry sector are approved by the Management Board. The exposure to any one borrower including banks is further restricted by sub-limits covering on and off-balance sheet exposures and daily delivery risk limits in relation to trading items. Actual exposures against limits are monitored daily. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees. Credit related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees, which represent irrevocable assurance that the Bank will make the payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans and guarantees. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total commitments since commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. Geographical concentration of assets, liabilities and off balance sheet items The majority of Bank s customers are Bulgarian citizens and local legal entities. The bank correspondent banks are Bulgarian and Slovenian banks with investment rating. The Bank is exposed to many sectors of the Bulgarian economy. However, credit risk is well spread over a diverse range of individual and commercial customers. 19
c Market risk The Bank takes on exposure to market risks. Market risks arise from open positions in interest rate and currency products, all of which are exposed to general and specific market movements. The Bank estimates the market risk of positions held and the maximum losses expected, based upon a number of assumptions for various changes in market conditions. The Management Board sets limits on the value of risk that may be accepted. d Currency risk The Bank takes on exposures to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Management Board sets limits on the level of exposure by currency which are monitored daily. As a principle, the Bank does not maintain open currency positions. The table below summarizes the Bank s exposure to foreign currency exchange rate risk at 31 December 2004. Included in the table are the Bank s assets and liabilities at carrying amounts, categorized by currency. 20
e Interest rate risk The Bank takes on exposures to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. The Management Board sets limits on the level of mismatch of interest rate repricing that may be undertaken, which is monitored daily. The Management Board is satisfied that the Bank s position is such that exposure to movements in interest rates is minimized. The table below summarizes the effective weighted average interest rate by major currencies for monetary financial instruments at year-end. Interest sensitivity of assets, liabilities and off balance sheet items The table below summarizes the Bank s exposure to interest rate risks. Included in the table are the Bank s assets and liabilities at carrying amounts, categorized by the earlier of contractual repricing or maturity dates. 21 Expected repricing and maturity dates do not differ significantly from the contract dates, except for the maturity of BGN 2,600 thousand of due to customers up to 1 month, of which 84% represent balances on current accounts considered by the Bank as a relatively stable core source of funding of its operations.
e Interest rate risk (continued) 22 f Liquidity risk The Bank is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, loan drawdowns, and guarantees. The Bank does not maintain cash resources to meet all of these needs as experience shows that a minimum level of reinvestment of maturing funds can be predicted with reasonable certainty. The Management Board sets limits on the minimum proportion of maturing funds available to meet such calls and on the minimum level of interbank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand. The Bank is trying to maintain balance between maturity terms of attracted funds and flexibility in the usage of funds of various maturity structures. The table analyses assets and liabilities of the Bank into relevant maturity groupings based on the remaining period to the contractual maturity date at balance sheet date.
f Liquidity risk (continued) 23 g Fair values of financials assets and liabilities Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price. The estimated fair values of financial instruments have been determined by the Bank using available market information, where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to determine the estimated fair value. While Management has used available market information in estimating the fair value of financial instruments, the market information may not be fully reflective of the value that could be realised in the current circumstances. The table below summarizes the carrying amounts and fair values of the Bank s assets and liabilities.
g Fair values of financials assets and liabilities (continued) a) Due from other banks Due from other banks includes inter-bank placements and items in the course of collection. The fair value of floating rate placements and overnight deposits is not materially different from their carrying amount. b) Loans to customers Loans are carried at amortised cost and are net of provisions for impairment. The estimated fair value of fixed rate loans and advances to customers represents the discounted amount of estimated future cash flows, expected to be received. To determine fair value estimated future cash flows are discounted at market interest rates prevailing at the balance sheet dates. Due to the fact that the loans to customers were extended close to the balance sheet date and the prevailing market interest rates have not changed materially in the intermediate period, the Management has estimated that the fair value of loans to customers is not materially different from their carrying amount. c) Due to other banks and due to customers The fair value of due to other banks and customer current accounts and term deposits approximates their carrying amount due to their short-term nature. d) Other borrowed funds 24 Borrowed funds carry floating rates and due to their interest rate repricing carrying value is not materially different from their fair value.
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8 Cash and balances with Central Bank (continued) At 31 December 2004 the statutory minimum required reserve represented 8% of demand and time deposits, except for the deposits of local banks and all deposits of other customers with maturity over two years. 27 Included in investment securities held-to-maturity is accrued interest receivable of BGN 50 thousand (2003: nil).
Included in loans to customers is accrued interest receivable of BGN 138 thousand (2003 :BGN 13 thousand). Economic sector risk concentrations within the customer loan portfolio before provisions were as follows: 28 As at 31 December 2004 the ten largest loans and advances to customers represent 55.7 % of the Bank s loan portfolio after provisions. As at the end of 2003 the Bank had only 5 outstanding loans.
Due to other banks includes accrued interest of BGN 23 thousand at the end of 2004. (2003: BGN 5 thousand) 29 Due to customers includes accrued interest of BGN 15 thousand at the end of 2004 (2003: BGN 5 thousand). As at 31 December 2004 the ten largest deposits from customers represent 49 % of the Bank s total due to customers and 17% of total liabilities.
Other borrowed funds include accrued interest of BGN 13 thousand (2003: nil). Where the Bank is the lessee the future minimum lease payments under non cancellable building operating leases are as follows: 30 Mandatory reserve deposits are held with the Central Bank in accordance with statutory requirements.
At 31 December 2004 the total share capital represents 15,800,000 ordinary shares (2003:13,691,810) with nominal value of BGN 1 each. All shares carry equal voting rights and are fully paid. The shareholders of the Bank are: The Bank has tax losses of BGN 1,370 thousand (2003: BGN 1,506 thousand) and related unrecognized deferred tax asset of BGN 206 thousand (2003: BGN 294 thousand). The benefit of these income tax losses will expire in 2008. Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. The bank is controlled by Aktiva Holdings B.V. (incorporated in Netherlands), which owns 72.5% of the ordinary shares. The ultimate parent is Aktiva Capital (incorporated in Luxemburg). A number of banking transactions are entered into with related parties in the normal course of business. These include loans, deposits and bonds purchases. These transactions were carried out on commercial terms and at market rates. The volumes of related party transactions outstanding at the year end, and relating expense and income for the year are as follows: 31 In 2004, the total remuneration of the directors was BGN 173 thousand (2003:BGN 20 thousand).
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33 West-East Bank AD INTERPRED World Trade Centre Sofia 36 Dragan Tsankov Blvd. 1040 Sofia, Bulgaria Tel: + 359 2 / 970 24 10; Fax: + 359 2 / 970 24 42 www.westeastbank.com SWIFT: WEBKBGSF